A shorter version of this article was first published in The Nebraska Cattleman magazine.
About one of the only things certain about forecasts this year has been the great deal of uncertainty. Numerous “novel” situations have confronted the industry making it difficult to estimate price magnitudes rather than just price direction. Clustered plant closures, government quarantine restrictions, and increasing at home phone consumption are just a few of the major issues the beef industry has had to tackle in the last six to eight months. Some things have returned to “normal” such as packing plant capacity and food service demand. Others are still in ongoing recovery.
Who knows what “normal” or “standard operating procedure” will look like in the future! Most of the modifications occurring involve trying to meet changing consumer demand and meat processing/packaging. While this does not directly impact the ability of an operation to raise a steer, it indirectly impacts each operation through changes in price premiums passed from the supply chain. These modifications have impacted the “normal” or predictable price/basis seasonality patterns this year.
Seasonal patterns allow producers to make informed production and risk management decisions. These historical patterns combined with current market information and operational cost of gain (COG) and breakeven prices allow evaluation of cash forward offerings. Deviations from the seasonal patterns largely occurs due to overlaying trends, industry cycles, and unique supply and demand factors. In this article I review what are some of the price/basis forecasts for three beef market segments: 1) beef wholesale, 2) live cattle, and 3) feeder cattle. In addition, I focus how production in the other protein sectors (i.e. pork and chicken) could potentially impact these price projections. I provide these price/basis projections with projections from the Livestock Marketing Information Center (LMIC).
Three items economists are closely watching are consumer confidence, gross domestic product, and potential government quarantine restrictions. U.S. consumer sentiment, a measure of how well the economy is doing, dropped from 101 in February 2020 to 72.5 in July 2020 a 28.5 point drop. Asian and European confidence levels show similar consumer confidence declines. This suggests that the consumers largely believe the current economic recession is likely to continue into the near future. U.S. real gross domestic product (GDP), a broad market indicator of economic growth adjusted for inflation, is also slowing. GDP decreased at an annual rate of 5.0% in the first quarter and 32.9% in the second quarter. Depressed GDP growth is largely the effect of businesses not being able to conduct commerce due to quarantine restrictions. While business optimism has been increasing due to loosening government restrictions, concerns about further restrictions given government reactions to rising cases could dampen this sentiment. Combined these would suggest that beef demand is likely to be lower in the fall of 2020 and into the winter of 2021. If businesses are able to continue to conduct commerce, then GDP will rise and with it consumer confidence. While the latter part of Q1:2020 and all Q2:2020 was all characterized by supply disruptions in the beef supply chain, Q3:2020 and Q4:2020 are likely to be driven largely by consumer demand. Given varying responses to consumer demand and economic conditions, composite retail beef prices are likely to be $7.45 per lb. but range from $7.32 per lb. to $8.38 per lb. Beef is forecasted to be considerably higher than either pork or chicken. Average retail pork prices are estimated at $4.20 per lb. and average retail composite chicken prices are estimated at $2.08 per lb.
Wholesale Boxed Beef
Packing plants were the highlight of Q2:2020 with rising cases among plant workers forcing temporary closures and implementation of CDC and OSHA requirements for plant workers. Lack of packing capacity seemed to have backed up cattle that were ready to harvest creating a situation where consumer demand for retail meat remained high and the need for live cattle temporarily dropped. This resulted in large packing plant margins and a “surplus/backlog” of cattle. After plants reopened cattle slaughter has been near equal to 2019 slaughter numbers. Steer, heifer, and cow slaughter has been nearly unchanged from 2019 since the middle of May. Cattle originally scheduled for harvest between March and May are being harvested but the added number of days on feed has considerably raised dressed weights. For example, from 2014-2019 steer dressed weights tended to decrease from 895 lbs. in Jan to 845 lbs. in May. Since Jan 2020 steer dressed weights have stayed constant at 895 lbs. A similar phenomenon is seen in heifer dressed weights. The big question is how quickly the packing plants can work through the surplus/backlog of cattle. I believe that commercial slaughter will stay high (~2.5-5% higher) till at least through September creating a lot of retail and foodservice beef consumers would need to consume. Given this and historical seasonal and trends from 2002-2019 I would anticipate wholesale beef cutout prices to stay somewhat elevated above historical averages at or around $257 per cwt. in Q3:2020 and Q4:2020. A plausible range of $230 per cwt. if consumer demand is lower and $287 per cwt. if consumer demand is higher are the bounds on this price estimate.
The backlog of cattle that the packing plant needs to work through can be partially observed through cattle that have been on feed greater than 120 days (COF > 120). As packing plants backed up, the COF > 120 spiked at 5.5 million head in June 2020, about 1.1 million more head than 2019. Since then it has started to decrease but remains 0.7 million higher than 2019 and 1.3 million higher than the five-year average. This backlog in cattle temporarily decreased local Nebraska cash prices for live cattle causing some concerns about basis and potential convergence issues in the April and June futures contracts. Given the volatile cash market and since basis tends to be more predictable than cash, I provide basis, rather than cash forecasts, for steers and heifers for live cattle futures contracts ending in October and December. Based on seasonal patterns, recent trends, and potential issues with clearing up the surplus/backlog of market ready cattle I believe local cash prices in Nebraska will be lower than futures prices in both Q4:2020 for steers and heifers. I estimate basis for steers and heifers in October to be -$0.85 and -$0.38, respectively. In Q4:2020 I estimates basis for steers and heifers to be -$1.29 and -$0.39 respectively. Please note, a feedlots hedge on live cattle prices relies upon the difference between the expected basis and actual basis with stronger basis patterns benefiting short hedgers. These estimates would suggest that basis is estimated to be weaker than historically observed thus potentially hurting hedges that were placed using historical averages. Using other risk management strategies to protect against some of the potential basis risk is recommended.
Cattle have been able to stay on feed longer due to cheaper corn prices. As quarantine restrictions limited travel, consumer demand for gasoline, and thus ethanol, decreased. December futures Corn prices in March 2020 decreased from $4.00 per bu. to $3.30 per bu. in July 2020. While corn became cheaper due to falling ethanol demand, idling ethanol plants lowered the available supply of distiller grains. This caused distiller grain prices to rise relative to corn creating economic disincentives to feed distiller grains. Wet distiller grain (WDG) prices in Nebraska relative to corn have averaged 30% higher since 2016. During April 2020, WDG prices relative to corn spiked at 110%. For example, if corn was trading locally at $3.00 per bu., then WDG prices would be over $6.00 per bu. on a dry matter basis. Since then, the price ratio has come down to historically normal levels. Price estimates for WDG relative to corn in Nebraska are estimated at 5% lower in Q3:2020 and 10% higher in Q4:2020. Given the recent volatility in the corn and ethanol refinery market coupled with a moderate drought, the variation in these estimates is quite large. For Q3:2020 relative WDG prices could range from 20% lower to 15% higher relative to corn and for Q4:2020 the range is 15% lower to 50% higher. Aggressive risk management on feed inputs is essential moving into the fall.
The lack of capacity in feedlots to take in freshly weaned calves this fall could put downward pressure on both local and national feeder cattle prices. This pressure could be accelerated if pasture conditions continue to deteriorate. In the middle of July, pastures rated “good” or “very good” accounted for 30-35% of total pasture nationally. This is about 10-15% lower than the 5-year average and 15-20% lower than 2019. Pastures in Nebraska have generally fared better compared than national pastures. Approximately 40-45% of pastures rate “good” or “very good”. Drought conditions which have continued to grow in the Southwest are already forcing feeder cattle producers to make decisions about destocking and depopulating. Producers choosing to destock feed cattle in drylots with corn or hay are faced with lower than normal hay stocks. As of May 2020, hay stocks in the Southwest were low with the exception of Texas. Nebraska had very high hay stocks heading into this crop year with 1380 (1000 tons) of hay. Even with lower than average hay production this year there seems to be a large amount of hay available to feed cattle forced to remain outside of feedlots. Nebraska producers are likely to faced with decisions about selling hay at a premium out of state or keeping hay for their own operation. In either case, all hay prices are likely to tend higher this fall and winter. I estimate that the national “all hay” price (alfalfa + other hay) to be $156.00 per ton in Q3:2020 and $154.00 per ton in Q4:2020. The prices are likely to stay within the $135 - $175 range the second half of this year. The magnitude and direction of these price movements will be largely driven by the ability of feedlots to process cattle, corn prices, and evolving drought conditions.
Feeder cattle prices tend to be more volatile than live cattle prices due to the nature of production and location in supply chain (i.e. the magnitude of impact in the feeder cattle sector will always be larger than the magnitude of impact in the feedlot). This combined with current market situations with COVID-19 and uncertainty in drought progress, I once again estimate feeder cattle basis for 500-600 lb. steers and heifers and 800-900 lb. steers and heifers in Nebraska using the Nebraska combined auction price data and nearby futures prices from CME. I estimate that basis for 5-6 cwt. steers and heifers in Q3:2020 to be $30.35 per cwt. and $11.09 per cwt. respectively. The basis for 8-9 cwt. steers and heifers in Q3:2020 I estimate to be $3.99 and -$6.57 per cwt., respectively. I estimate that basis for 5-6 cwt. steers and heifers in Q4:2020 to be $27.68 per cwt. and $6.65 per cwt. respectively. The basis for 8-9 cwt. steers and heifers in Q4:2020 I estimate to be $4.24 and -$6.04 per cwt., respectively. Given these estimates, basis is expected to be, on average, weaker than the historical 5-year average by about $2-3 per cwt. in Q3:2020 and weaker than the historical 5-year average by about $0.50-$2 per cwt. in Q4:2020. These estimates would suggest that basis is estimated to be weaker than historically observed thus potentially hurting hedges that were placed using historical averages.
All estimates are summarized in Table 1 and the historical and forecasted ranges are in Figures 1-6.
|Beef – National||7.62||7.32||7.94||7.77||7.22||8.37|
|Pork – National||4.30||4.16||4.46||4.24||3.99||4.50|
|Chicken – National||2.07||1.99||2.15||2.06||1.94||2.18|
|Wholesale Beef ($/cwt.)|
|Cutout – National||257.10||224.95||294.84||256.68||211.39||313.88|
|Live Cattle Basis ($/cwt.)|
|Steers – Nebraska||-1.06||-8.86||6.74||-0.91||-14.28||12.46|
|Heifers – Nebraska||-0.61||-8.64||7.42||-0.44||-14.32||13.45|
|Feeder Cattle Basis ($/cwt.)|
|Steer 5-6 cwt. – Nebraska||30.35||18.62||48.47||27.68||14.92||51.35|
|Heifer 5-6 cwt. – Nebraska||11.09||-1.67||23.86||6.65||-9.56||22.87|
|Steer 8-9 cwt. – Nebraska||3.99||-2.39||10.39||4.24||-2.67||11.17|
|Heifer 8-9 cwt. – Nebraska||-6.57||-14.65||1.51||-6.04||-16.64||4.56|
|Corn – Nebraska||121.48||108.42||136.25||127.51||107.50||151.26|
|DDG – Nebraska||141.79||107.91||189.66||143.57||95.34||252.34|
|WDG – Nebraska||124.69||101.18||148.20||144.29||102.19||186.40|
|Hay – National||156.40||168.11||145.52||154.77||178.32||138.21|